From the beginning of the year, bitcoin, the main cryptocurrency, has been going through a frantic fever. In April, the exchange rate soared above $60,000 per coin. Then the frenzied surge in exchange rates gave way to a hard landing - now one bitcoin is worth between $30,000 and $40,000. No expert can accurately predict what will happen next. However, there is no doubt that the industry will continue to actively develop and the volume of capitalization of cryptocurrencies will grow.
Dozens of new cryptocurrencies enter the market every month, and there is a buyer for every coin. There is even a so-called "bitcoin lottery" where the reward is cryptocurrency. When bitcoin grows by 20-30% in one day, it doesn't matter that you own some software code instead of real money.
People are optimistic about cryptocurrency because of the huge number of stories with a good ending. When someone bought crypto for $20 and sold it for $100. Then they bought it again for $20 and sold it for $1,000. "People have an opinion that even if cryptocurrency is falling now, it will still grow in the long run," says Eugene Kovalenko, author of the largest Telegram channel about investments "Lemon for Tea".
And forecasts of bitcoin value at the level of $100-500 thousand only fuel the excitement. And this scares economists and governments, because if they do not control the development of cryptocurrency, the money we are used to may be useless and the financial system of the world may come crashing down. Then the Fed and the ECB risk becoming empty acronyms from the past.
On the other hand, those who foment panic and hype by trumpeting about the great future of cryptocurrencies risk saying goodbye to their money in a second. It cannot be ruled out that the hype for digital assets will "collapse" at a moment's notice.
Economists and financiers told Prime News Agency about the future of cryptocurrencies and the new crises that financial technology is preparing for us.
Why people believe in cryptocurrencies
Today, cryptocurrency is just a nascent industry. Right now, the capitalization of the entire cryptocurrency market is $1.5 trillion (of which about 42% is bitcoin). This is a very modest figure. For comparison, the capitalization of all global equities is currently about $120 trillion, and the global bond market is valued at about the same amount.
But there are specific technologies and functions behind the cryptocurrency market, which means it has a future.
People believe in cryptocurrencies for three reasons:
- First, the industry has proven to be resilient. It's been 13 years since the first cryptocurrency, bitcoin, appeared.
- Secondly, there is big money coming into the crypto industry.
"The most advanced private equity funds invest in cryptocurrency projects, investment banks open analytical departments researching digital assets, payment and technology companies recruit employees versed in the industry. Naturally, for them it is a specific bet on the technology of cryptocurrencies, not just a tribute to the general hype," says independent financial analyst Vladimir Ananiev.
- Thirdly, the period of low interest rates prompted investors to search for more profitable financial instruments, one of which is high-risk cryptocurrencies, the analyst added.
There is now a certain period of cooling to digital assets, caused by increased regulatory pressure on the industry, which caused many investors to refocus on gold as a risk hedge. But according to Aaron Chomsky, head of investment at ICB Fund, those who have already entered the cryptocurrency space have no doubts about its prospects.
There are two reasons: the transformation of the economy and falling confidence in fiat currencies due to the unprecedented economic stimulus by the world's leading central banks during the COVID-19 pandemic.
Revolution and regulation
"Blockchain has the potential to produce the same revolution that the Internet once did. The same Ethereum is a platform for decentralized applications, and some of its rivals could become the technological 'fabric' of the new economy. The emergence of national digital currency projects that could involve this technology to some degree only reinforces the idea," Chomsky says.
According to a 2020 World Bank study, about 20 percent of 66 central banks are considering the introduction of national digital currencies in the next six years. China, for example, began testing its own digital currency last year. The United States, the United Kingdom, France, South Korea and others are working on similar steps. And this week, the state of El Salvador officially recognized bitcoin as a means of payment on par with the U.S. dollar.
Interest in blockchain technology among governments of different countries arises for another reason: to protect citizens from various crypto-frauds. "This is what led to the regulation of traditional stock markets, and the same will eventually happen with digital assets. The regulation will be perceived negatively at first, but eventually it will protect investors from unfair practices in the market," Ananyev says.
In China, where the digital yuan is being developed, the Central Bank has banned the country's financial institutions and payment systems from providing services with cryptocurrency transactions.
"Against this backdrop, bitcoin lost about 10% overnight, from $41,000 to $36,000. If other countries follow China's example, especially the U.S., it will pull cryptocurrencies down. Which will probably finish them off. Because people won't be able to use crypto legally," emphasizes Kovalenko.
If this kind of blocking starts on the part of most states, it will put an end to cryptocurrencies forever. Of course, they will not disappear, but they will not be used as massively as they are now.
Tipping Point
And yet the widespread banning of cryptocurrency is still a fantasy, as is its imminent mass use. Blockchain is still a new and underutilized tool. The cryptocurrency market in terms of capital involved is relatively small, and there is little serious money in it yet.
This means that the crypto market can't have a tangible impact on traditional financial markets yet, but if its share of global capital grows in the future, many investors will have a hard time. The fact is that an uncontrolled fall of any major asset can drag down the entire economy.
But here we should consider the difference between the loss of value of a cryptocurrency and the termination of its existence. Digital assets are firmly tied to programming, verification and data storage. If - purely hypothetically - the technology behind the crypto-asset fails, the impact would be real on the economy.
"Imagine if the Internet suddenly went down on the planet, no matter what the reason. That's the answer to the impact question. But there's still a long, long way to go to that level of dependence," Ananyev said.
In the meantime, bitcoin, due to its limited supply, acts as a digital analogue of gold. Many people are looking to it for an escape from the loss of purchasing power of money. And this paradigm is gaining more and more supporters, the financier concluded.
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